According to the Data from FMDQ platform, The Central Bank of Nigeria (CBN) lent the Deposit Money banks (DMBs) a sum of N8trillion from the standing lending facility. The credit support from the CBN to the DMBs is to level up the liquidity level in the financial system and short term interest adjusted downward.
As a result of increase in short term interest rate, the CBN is considered on a heating up position, banks have started to increase lending rate on credit creation. Money market rate come under pressure due to the large auction ticket sold by the authority. This shows that there is higher level of money in the economy, supporting inflation surge.
Afrinvest Limited said in its February note that the Standing lending facility rate has increased from 19.75% to 3.27%. The investment firm said due to CBN’s tough sterilization of liquidity, banks are heavily reliant on the standing lending facility for liquidity, tapping ₦8.6 trillion so far in 2024 – as of Feb 29.
Last week, the settlement of the treasury bills auction further intensified liquidity tightness within the system, contributing to sustained elevsated in interbank rates. The investment banking firm stated that this was 11.6x higher than the average borrowings from the window in the comparable period of 2022 and 2023.For the primary market, clearing rates at auctions would be recalibrated higher to successfully roll over maturing issues and raise new debt financing”, Afrinvest said.
Generally, money market rates have adjusted upward after the CBN hiked its benchmark interest rate by 4% to 22.75% in February 2024. On account of FX liqudity challenge, the CBN sold one year bills for 2145% as it seems to attract foreign inflows.
According to some Analyst, the increase in interest rate could reduce lending appetite of borrowers. It was predicted that high interest rate could drive default rates higher. Banks are expected to seek balance between lending to the real sector and investing in Government borrowing instrument.
Cardinalstone Partners said “adverse macroeconomic conditions are likely to increase the risk of non performing loans, NPLs, in 2024, with sectors that rely on imported raw materials and equipment maintenance such as manufacturing likely to be badly hit by the short-term cost implications of ongoing reforms”.
However, due to DMBs’ utilisation of the CBN’s SLF facility, the average system liquidity settled higher at a net long position of N1.37 trillion as against a net long position of N642.18 billion in the previous week.
“Barring any liquidity mop-up action by the CBN, we envisage the overnight rate to trend southwards as the principal and coupon payments for the maturing FGN MAR 2024 bond worth N771.11 billion are expected to support system liquidity” Cordros Capital said.
At the primary market auction, the CBN issued instruments to mop up ₦337.9 billion maturing bills, the CBN sold 91-day worth N14.4 billion against ₦66.6 investors’ demand. The CBN sold 182-day worth N10.6 billion from ₦51.5 staked by investors. The apex bank offered 364 days bills worth ₦312.9 billion, investors’ subscriptions came at ₦1.5 trillion and the CBN sold ₦1.3 trillion.